Reorganization of the Office of Finance; Authority To Issue Consolidated Obligations on Which the Federal Home Loan Banks Are Jointly and Severally Liable

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900, 910 and 941

[No. 99-61]

RIN 3069-AA88

Reorganization of the Office of Finance; Authority To Issue

Consolidated Obligations on Which the Federal Home Loan Banks Are

Jointly and Severally Liable

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing

to amend its regulations regarding the Office of Finance (OF), a joint

office of the Federal Home Loan Banks (Bank or Banks). The proposed

rule would reorganize the OF and broaden its duties, functions and

responsibilities in two key respects: the OF would perform consolidated

obligation (CO) issuance functions, including preparation of combined

financial reports, for the Banks; and the OF would serve as a vehicle

for the Banks to carry out joint activities in a way that promotes

operating efficiency and effectiveness in achieving the mission of the

Banks.

With respect to the issuance of COs, i.e., bonds, notes or

debentures, the proposed rule would make the Banks, rather than the

Finance Board, the issuers of COs under section 11 of the Federal Home

Loan Bank Act (Act). As proposed, this action would not have a

substantive effect on the debt issuance process or on the joint and

several obligation of the Banks on the COs, but it would make the Banks

responsible for accessing the capital markets through the OF to fund

their own operations. This is consistent with devolutionary actions

taken by Congress to give the Banks greater autonomy over the

management of their business and to remove the Finance Board from

involvement in Bank management functions.

The proposed rule also is intended to provide the powers,

operational independence, and flexibility the OF needs to be available

for the Banks' use as a central management facility with respect to all

joint Bank asset activities, and to facilitate the issuance of COs by

the Banks or the Finance Board under section 11 of the Bank Act.

The Finance Board is also proposing to make certain conforming

amendments to its policy statement entitled ``Financial Management

Policy of the Federal Home Loan Bank System'' (FMP). A Notice

describing the proposed FMP changes in detail is published elsewhere in

this issue of the Federal Register.

DATES: The Finance Board will accept comments on the proposed rule in

writing on or before March 6, 2000.

ADDRESSES: Send comments to Elaine L. Baker, Secretary to the Board, by

electronic mail at [email protected], or by regular mail at the Federal

Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.

Comments will be available for public inspection at this address.

FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Deputy Chief

Economist, Office of Policy, Research and Analysis, 202/408-2845,

[email protected], Charlotte A. Reid, Special Counsel, Office of

General Counsel, 202/408-2510, [email protected], or Eric E. Berg, Senior

Attorney, Office of General Counsel, 202/408-2589, [email protected].

Staff also can be reached by regular mail at the Federal Housing

Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Overview of Proposal

The proposed rule would establish a new structure for the OF to

accommodate additional functions proposed to address new challenges

faced by the Bank System. With respect to the issuance of COs, the

proposed rule would authorize the Banks, rather than the Finance Board,

to issue COs, as discussed more completely below. This action is

consistent with the Finance Board's ongoing efforts to remove itself as

much as it can legally do from involvement in the management of the

Banks, and with devolutionary actions taken by Congress to give the

Banks greater autonomy over the management of their business.

Notwithstanding the fact that the members of the Bank System know

their communities and customers' needs best, the mortgage market is no

longer the fragmented, localized market that it was when Congress

created the Bank System in 1932. Driven by technological improvements,

the mortgage market's delivery systems have become more national in

scope, and the mortgage market now plays a central role in the national

economy. The need for ``an appropriate vehicle for coordination of

System-wide business issues,'' such as a central facility to assist the

Banks in managing various aspects of their operations, including

mortgage-related assets, has grown in the ten years since Congress

confirmed the OF as a joint office of the Banks in the Financial

Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).\1\

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\1\ See Pub. L. 101-73, tit. VII, sec. 702, 103 Stat. 183 (Aug.

9, 1989). A General Accounting Office (GAO) report commissioned by

Congress in section 1393 of the Housing and Community Development

Act of 1992, which was issued on December 8, 1993 (GAO/GGD-94-38)

(GAO Report), noted that FIRREA made ``many changes'' to the Bank

System that ``introduced significant cultural changes for the Banks

and their members.'' GAO Report at 19-20. Principally, after FIRREA,

the Banks were no longer involved in the oversight and supervision

of their members. The members henceforth only would view the Banks

as a credit facility, and this change would promote the cooperative

nature of the Bank System. GAO concluded, however, that to attract

new, voluntary members and retain members, the Banks ``must provide

sufficient value--through the products and services offered and the

dividends paid--to warrant the required stock investment for

membership.'' Id. at 21. The GAO Report noted the need for

coordination of System-wide business issues. Id. at 117.

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The Finance Board believes that the market has created an incentive

and a business need for a facility controlled by the Banks and their

members to provide economies and efficiencies of scale, as it has done

for the issuance of COs by the Finance Board, by giving the Banks the

flexibility to centralize certain of their common business functions.

The Finance Board anticipates that this need will become even more

critical as the Banks develop asset activities such as Member Mortgage

Assets as part of their core business.\2\ Not only would such a

facility provide operational benefits, it also would enhance the safety

and soundness of the operations by providing both expertise and a

mechanism for achieving risk management, and geographic diversity on a

joint asset portfolio basis. In light of the recent enactment of Title

VI of the Gramm-Leach-Bliley Act, the Federal Home Loan Bank System

Modernization Act of 1999,\3\ the Finance Board is taking this

opportunity to propose a reorganization of the OF that will allow this

joint office of the Banks to function in this way at the request of the

Banks and facilitate growth in the Bank System's business as the Banks

seek to provide their members with new credit products and respond to

changes in the marketplace and congressional mandates. The Finance

Board believes having the OF serve these functions is particularly

important because the OF is the only statutorily acknowledged and

sanctioned joint office for the Banks,

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and the legal authority for the Banks to establish other joint entities

is in question.\4\

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\2\ Indeed, GAO foresaw this need, stating that ``there may be a

need for a central coordinating mechanism * * * [that] should reside

in the [Bank] System itself.'' See GAO Report at 113. The GAO Report

observed that there were certain positive goals that could be

attained by relieving the Finance Board of certain Bank System

governance functions, including enhanced cost control and the

centralization of ``certain business functions.'' Id. at 114.

\3\ Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999).

\4\ See, e.g., section 304(a) of the Government Corporation

Control Act, codified at 31 U.S.C.A. Sec. 9102 (West 1994).

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A. Issuance of Consolidated Obligations

Since 1946, the operations of the Banks and member demand for

advances have been financed principally with the proceeds from COs

issued pursuant to section 11(c) of the Bank Act by the Finance Board,

or its predecessor agencies. See 12 U.S.C. 1431(c). The Banks,

individually and collectively, are the sole obligors on COs issued by

the Finance Board under section 11(c) of the Bank Act.\5\ The issuance

of COs by the Finance Board under section 11(c) of the Bank Act is

governed by Finance Board regulations set forth in 12 CFR parts 910 and

941, the FMP and an annual debt authorization. The Finance Board is

proposing to achieve the goal of continuing to give the Banks the

autonomy to manage and run their own businesses by authorizing the

Banks to issue joint debt pursuant to section 11(a) of the Bank Act

through the OF as agent for the Banks, which would still be called COs,

on which the Banks would be jointly and severally liable. See 12 U.S.C.

1422a(a)(3)(B)(iii), 1431(a) and (d). Section 11(a) of the Bank Act

provides that the Banks may issue bonds, debentures or other

obligations ``upon such terms and conditions'' as the Finance Board may

approve and ``subject to the rules and regulations prescribed by'' the

Finance Board. See id. 1431(a). Under the proposed rule, the same rules

governing the apportionment of joint-and-several liability with respect

to COs issued by the Finance Board through the OF as agent pursuant to

section 11(c) of the Bank Act would apply to COs issued by the Banks

through the OF as agent pursuant to section 11(a) of the Bank Act.\6\

To eliminate the potential for conflicts to the Finance Board in its

role as regulator of the OF and the Banks, the Finance Board is

removing itself from its role as issuer of the COs, and instead

allowing the Banks to raise funds in the capital markets to fund their

operations, a management function tied directly to member demand. While

the Finance Board has long been uncomfortable serving in both of these

capacities, the process, while awkward, has worked quite successfully.

However, the Finance Board's discomfort turned to concern over

potential liability for the United States as a result of litigation

arising from the bankruptcy of the County of Orange, California.

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\5\ Id. 1431(b)-(d). The Bank Act makes clear that obligations

of the Banks issued with the approval of the Finance Board are not

the obligations of, and are not guaranteed by, the United States.

See id. 1435. Congress underscored this precept in the Federal

Housing Enterprises Financial Safety and Soundness Act of 1992,

which provides in pertinent part that none of the housing

government-sponsored enterprises' obligations or securities are

backed by the full faith and credit of the United States. See Pub.

L. 102-550, tit. XIII, sec. 1304, 106 Stat. 3944 (Oct. 28, 1992)

(codified at 12 U.S.C. 4503).

\6\ On October 12, 1999, the Finance Board published a final

rule clarifying for the Banks how their joint-and-several liability

on COs would operate, and elucidating for bondholders how they

benefit from the Banks' joint-and-several liability. See 64 FR 55125

(Oct. 12, 1999). The Bank System has been and remains financially

strong. As of September 30, 1999, there were over $477 billion in

COs outstanding. In the history of the Bank System, no Bank has ever

been delinquent or defaulted on a principal or interest payment on

any CO issued by the Finance Board or its predecessor agencies. The

joint-and-several liability of the Banks on the COs is an integral

part of investor confidence in Bank System debt.

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In the course of the Orange County litigation, (which has since

been settled with respect to the Banks, the OF and the United States),

the United States District Court for the Central District of California

held that Orange County had stated a claim for relief based on its

contention that the United States had violated the federal securities

laws in the issuance of certain COs. The District Court also found that

Orange County's claim for ``restitution'' against the United States

under the provisions of the Administrative Procedure Act was not barred

by the doctrine of sovereign immunity. The Finance Board does not

endorse these holdings, but has determined it is prudent to limit any

further risk to the United States from such suits. By taking the

proposed action, the Finance Board can accomplish this goal as well as

that of making the Banks responsible in name for this most central

aspect of their business.

As a natural and necessary adjunct to the issuance of COs, the

Banks also should be responsible for the preparation of the disclosure

documents that facilitate CO issuance and for the periodic combined

financial statements for the Bank System. Logic dictates that the OF,

as the only joint Bank System office and existing agent for CO

issuance, is the most appropriate entity to perform that function. The

OF already prepares the offering documents used in the sale of the Bank

System's COs, services the Bank System's debt, and possesses knowledge

of the Bank System's financial statements, operations and condition.

The Finance Board believes that transferring the function of preparing

combined Bank System annual and quarterly financial reports to the OF

is entirely appropriate and a provision making the transfer is included

in the proposed rule.

The proposed rule will codify the disclosure standards set forth in

the Finance Board's ``Statement of Policy: Disclosures in the Combined

Annual and Quarterly Financial Reports of the FHLBank System'' (Policy

Statement). See 63 FR 39872 (July 24, 1998). These standards generally

require the combined annual and quarterly financial reports of the Bank

System to be prepared in a manner that is, in the judgement of the

Finance Board, consistent with the disclosure requirements promulgated

by the Securities and Exchange Commission (SEC). While securities

issued by the Finance Board or the Banks are exempt from the

registration and reporting requirements of the Securities Exchange Act

of 1934, 15 U.S.C. 77c(a)42 (1934 Act), the Finance Board believes that

the disclosure requirements promulgated by the SEC pursuant to the

federal securities laws represent best practice, and that financial and

other disclosure concerning the Bank System should conform to this

standard to the greatest extent practicable. However, having determined

that certain areas of disclosure are either inapplicable or

inappropriate for the Bank System, the Finance Board has provided a

list of exceptions to the general standard in the Appendix to the

proposed rule. Preparation of combined Bank System annual and quarterly

financial reports should be greatly simplified by the codification of

uniform disclosure standards.

In the area of compensation disclosure, the Finance Board notes

that Item C of the proposed Appendix requires disclosure of

compensation information only for the 12 Bank presidents and the CEO of

the OF, whereas the SEC's regulations require that information for the

CEO, the 4 other most highly compensated executive officers who held

such offices during the last completed fiscal year, and up to 2

additional individuals for whom disclosure would have been provided but

for the fact that the individual was not serving as an executive

officer at the end of the last completed fiscal year. This exception

was adopted when the Finance Board regulated the compensation of Bank

employees, and was intended to avoid the volume of disclosure that

would result from applying the SEC standard to twelve Banks and the OF.

However, now that Bank employee compensation has been deregulated, the

Finance Board seeks comment on whether it should (1)

[[Page 326]]

expand the number of individuals for whom the required compensation

information would be provided and (2) change the triggering criteria

for compensation disclosure from title/position to income level, or

from individual Banks to the Bank System overall.

While the Finance Board is proposing that the OF prepare the Bank

System's annual and quarterly financial reports, the Finance Board will

continue to be responsible for oversight of the combined Bank System

financial reports' compliance with the applicable disclosure standards.

Accordingly, the proposed rule provides that the Finance Board in its

sole discretion will determine whether or not a combined annual or

quarterly report prepared by the OF meets the prescribed regulatory

standards. The proposed rule requires the OF to promptly comply with

any directive the Finance Board issues regarding the preparation,

filing, amendment or distribution of the combined annual or quarterly

financial reports.

B. Restructuring of the Office of Finance

The Finance Board long has recognized the importance of an

organizational structure for the OF that reflects its duties and

responsibilities. The Finance Board has re-evaluated the appropriate

organizational structure of the OF in light of the changes proposed

herein, with two key goals in mind. First, the Finance Board wants to

build on the governance model in the Bank Act, particularly after

enactment of the Gramm-Leach-Bliley Act, whereby the Banks should have

the autonomy to manage and run their own businesses. Second, the

Finance Board wants to give all of the Banks representation on the OF

Board of Directors to best achieve their operational goals.

Additionally, the Finance Board has considered that the members of the

OF Board of Directors should possess experience and qualifications to

enable the Board to be most effective in exercising business judgment

in its policy-making and decision-making roles. The proposed

reorganization is designed to provide the structure, additional

functions and operational capacity the OF must possess in order to

accommodate the evolving business needs of the Banks.

The Finance Board proposes to significantly alter both the size and

composition of the OF Board of Directors. Based on the considerations

described above, particularly the increased role being proposed for the

OF, the Finance Board believes that the Bank System would best be

served by an OF Board of Directors that includes representatives from

each Bank, members of the Bank System, and the general community.

Accordingly, the proposed rule would expand the OF Board of Directors

to a total of 24 members, 12 of whom would be appointed by the Banks, 6

of whom would be elected by Bank System members, and 6 of whom would be

appointed by the Finance Board. However, recognizing that this number

of directors may be unwieldy, the Finance Board invites comments

addressing alternative board structures for the OF that would preserve

an appropriate balance of representation by the Banks, the members and

the public, as discussed more completely below.

II. Statutory and Regulatory Background

A. The Office of Finance

The OF was one of a number of joint Bank offices established by

regulation of the former Federal Home Loan Bank Board (FHLBB),

predecessor agency to the Finance Board. Over time, the OF has evolved

to support the Banks in responding to changes in the financial markets

and Bank System member funding requirements. As originally enacted in

1932, the Bank Act permitted the Banks to issue bonds and debentures,

and established a trust registrar, which was the genesis of the OF.

From 1934 to 1948, the FHLBB directed the Banks collectively to employ

a fiscal agent to issue and sell consolidated obligations.\7\ In 1948,

the FHLBB promulgated a regulation that created the Office of the

Fiscal Agent of the Banks within the Bank System to facilitate the

issuance of COs.\8\

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\7\ In 1934, Section 503 of the National Housing Act of 1934

amended section 11 of the Bank Act to provide authority to the FHLBB

to issue COs on which the Banks are jointly and severally liable

under sections 11(b) and (c) of the Bank Act (12 U.S.C. 1431(b) and

(c)). See H.R. 9680, 73rd Cong., 2d. Sess. (Pub. No. 479) (enacted).

The contractual duties of the Fiscal Agent expanded to include

managing the Banks' investment portfolios.

\8\ See 13 FR 7447 and 8269 (1948) (codified at 24 CFR 122.80

(1949)) (repealed). The regulation provided for the appointment of

the Fiscal Agent, and expanded the duties of the Fiscal Agent to

include the sale and purchase of Bank System securities. After the

Federal Home Loan Mortgage Corporation (Freddie Mac) was created in

1970, the FHLBB created an Office of System Finance (as a separate

Bank System office) to manage Freddie Mac's investment portfolios

and reserves with those of the Federal Savings and Loan Insurance

Corporation (FSLIC) in coordination with the Office of Fiscal Agent.

The Banks since had ceased having the OF perform investment services

on their behalf.

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In 1972, the FHLBB promulgated a regulation that merged the Office

of System Finance with the Office of Fiscal Agent and created the OF as

a Joint Bank System office. See 37 FR 16864 (Aug. 22, 1972) (codified

at 12 CFR 522.80-82) (repealed). The regulation provided for the OF to

perform any ``function, duty or authority'' previously vested in the

Fiscal Agent. In addition to issuing COs under the delegated authority

of the FHLBB and servicing the debt as a fiscal agent of the Banks, the

OF was required to perform other duties as requested by a Bank or

Banks, or the FHLBB. During the 1980's, those duties included

purchasing investment securities on behalf of the Banks, researching

alternative investment vehicles and strategies and managing assets

acquired by the FSLIC.

As a part of the amendments to the Bank Act made by FIRREA, the

existing joint or collective offices of the Bank System other than the

OF were abolished, and the FHLBB regulation governing the OF was

transferred to the Finance Board's regulations. See 12 U.S.C.

1422b(b)(2); 12 CFR 932.56(a)(3) (repealed). The Finance Board

reorganized the OF as fiscal agent of the Finance Board in issuing COs

under section 11(c) of the Bank Act. See 57 FR 2832 (Jan. 24, 1992); 57

FR 11429 (Apr. 3, 1992) (codified at 12 CFR 941.9(b)(1)). The rule

instituted a three-member Board of Directors for the oversight of the

management of the OF, executing daily operations and implementing the

Board of Directors plans and policies.\9\

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\9\ From 1972 to 1992, the OF was headed by a Director. See 12

CFR 932.55 (1992) (repealed). Following the reorganization, the OF

Board of Directors consists of two Bank presidents and one private

citizen, all appointed by the Finance Board.

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B. Consolidated Obligations

The Bank Act always has authorized the Banks to issue debt, and

empowered the regulator to issue rules, regulations and orders

governing virtually every aspect of a Bank's debt issuance.\10\ Under

the original statutory scheme, the Banks were jointly and severally

liable for the debt of any Bank.\11\ In 1934,

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section 503 of the National Housing Act \12\ amended section 11 of the

Bank Act (1934 amendments) to give the Bank System more ready access to

the capital markets, and authorized the FHLBB to issue consolidated

obligations on which the Banks would be jointly and severally liable.

12 U.S.C. 1431(b) and (c). Certain constraints on the Banks' power to

issue debt were eliminated by the 1934 amendments: the requirement that

security deposits be not less than 190 percent of any consolidated

issue was replaced by provisions limiting consolidated debentures

issued by the FHLBB under section 11(b) to 5 times paid in capital. The

1934 amendments also replaced the requirement in section 11(f) that all

Banks would be jointly and severally liable for obligations issued by

any Bank, as well as the proviso, with the more broadly drawn

requirements in section (a), that the Banks' power to issue debt ``upon

such terms and conditions as the Board may approve'' is ``subject to

the rules and regulations prescribed by the Board.'' Thus, the 1934

revisions to section 11 of the Bank Act gave broad authority to the

Banks' regulator to determine the terms and conditions for the issuance

of obligations on which the Banks would be liable.

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\10\ As originally enacted in 1932, section 11(a) permitted the

Banks to issue debt. It provided that ``Each Federal Home Loan Bank

shall have power, subject to the approval of the Board, * * * to

issue bonds and debentures having such maturities as may be

determined by the board, secured by the transfer of eligible

obligations of borrowing institutions on advances made by the bank

to borrowing institutions and by the deposit of home mortgages.''

Sec. 11, c. 522, 47 Stat. 733 (July 22, 1932).

\11\ Section 11(f) mandated that ``the Federal Home Loan Banks

shall be jointly and severally liable for the payment when due of

all bonds and debentures, and of notes and other obligations issued

by any Federal Home Loan Bank.'' Various provisions in section 11

required the Board to prescribe rules and regulations governing the

issuance and security for the bonds, notes or debentures, and set

requirements for the security for the Banks' debt. Section 11(f)

also specified that the Banks were permitted to make agreements to

ensure the payment of such obligations, so long as the agreements

did not restrict in any way the Banks' joint and several liability.

Section 11(f), however, contained a limited proviso permitting a

Bank independently to borrow ``temporarily,'' if the Bank clearly

disclosed that the liability was limited to it as the sole issuer,

and obtained the express approval of the FHLBB. See id.

\12\ Pub. L. 479, c. 847, sec. 503, 48 Stat. 1261 (Jun. 27,

1934).

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In 1989, Congress authorized the Finance Board to maintain the OF,

a joint office of the Banks, and to delegate to the OF the ministerial

functions associated with issuance of COs. See 12 U.S.C. 1422b(b)(1)

and (2). Accordingly, the Finance Board delegated to the OF the

authority to issue COs under section 11 of the Bank Act subject to

Finance Board regulations, resolutions or policies. See 12 CFR 900.30.

The issuance of COs is governed by part 910 of the Finance Board's

regulations (12 CFR part 910), the FMP and an annual debt

authorization. The operations of the OF are governed by part 941 of the

Finance Board's regulations (12 CFR part 941). The Finance Board's

regulations and the FMP provide for a leverage limit on the issuance

COs. Section 910.1(b) prohibits the issuance of senior bonds where

immediately following such issuance the aggregate amount of senior

bonds and unsecured senior liabilities would exceed 20 times the total

paid-in capital stock, retained earnings and reserves (exclusive of

loss and deposit reserves required pursuant to section 1431(g)) of all

of the Banks). See 12 CFR 910.1(b).\13\ Additionally, Finance Board

regulations require the Banks to maintain certain assets at all times

free of lien or pledge (the negative pledge requirement) to ensure

sufficient collateralization of the consolidated obligations.\14\

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\13\ The following definitions apply to the leverage limit

provisions: `` (b) 'consolidated bonds'' means bonds or notes issued

on behalf of all Banks;'' ``(c) 'senior bonds'' means consolidated

bonds issued pursuant to 12 U.S.C. 1431 and this part and not

defeased, other than bonds specifically subordinated to any then

outstanding consolidated bonds;'' ``(d) 'unsecured, senior

liabilities'' means all obligations of the Banks recognized as a

liability under Generally Accepted Accounting Principles, except (1)

liabilities that are covered by a perfected security interest; (2)

consolidated bonds; (3) bonds issued pursuant to 12 U.S.C. 1431(a);

and (4) allowances for losses for off-balance sheet obligations.''

12 CFR 910.0(b)-(d) (1999).

\14\ The ``negative pledge requirement'' is the regulatory

requirement that the Banks maintain certain types of unpledged

assets in an amount equal to the amount of the Bank's senior bonds

outstanding. See 12 CFR 910.1(c) (1999). Section 910.1(c) provides

in pertinent part:

The Banks shall at all times maintain assets of the following

types, free from any lien or pledge, in a total amount at least

equal to the amount of senior bonds outstanding: (1) Cash; (2)

Obligations of or fully guaranteed by the United States; (3) Secured

advances; (4) Mortgages as to which one or more Banks have any

guaranty or insurance, or commitment thereof, by the United States

or any agency thereof; (5) Investments described in section 16(a) of

the Bank Act, as amended (12 U.S.C. 1436(a)); and (6) Other

securities which have been assigned a rating or assessment by a

major nationally recognized securities rating agency that is

equivalent to or higher than the rating or assessment assigned by

such agency or senior bonds outstanding. (Proviso omitted).

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C. FMP

The FMP generally provides a framework within which the Banks may

implement their financial management strategies in a prudent and

responsible manner. Specifically, the FMP identifies the types of

investments the Banks may purchase pursuant to their statutory

investment authority. The FMP also includes a series of guidelines

relating to the funding and hedging practices of the Banks, as well as

to the management of their credit, interest-rate and liquidity risks,

and establishes liquidity requirements in addition to those required by

statute, as noted above. See FMP secs. III-IV.

The FMP evolved from a series of policies and guidelines initially

adopted by the FHLBB in the 1970s and revised a number of times

thereafter. The Finance Board adopted the FMP in 1991, consolidating

into one document the previously separate policies on funds management,

hedging and interest rate swap, and adding new guidelines on management

of unsecured credit and interest-rate risks.

III. Analysis of Proposed Rule

A. Overview

The proposed rule would amend parts 910 and 941 of the Finance

Board's regulations governing operation of the OF and issuance of COs,

to enable the OF to issue debt on behalf of the Banks pursuant to

section 11(a) of the Bank Act, require the OF to prepare the quarterly

and annual combined financial reports of the Bank System, and provide

services at the request of two or more Banks related to joint asset

activities undertaken by the requesting Banks, including the

administration of Member Mortgage Asset programs and liquidity

management. With the additional functions and operational capacity

established for the OF under the proposed rule, the Banks will have the

ability to make the most efficient use of the OF and its services and

thereby to maximize mission achievement as they develop new joint asset

activities.

B. Amendments to 12 CFR 900.30

The proposed rule would amend Sec. 900.30 of the Finance Board

regulations to provide for the termination as of December 31, 2000, of

the OF's authority to act as agent for the Finance Board in the

issuance of COs under section 11(c) of the Bank Act. By this provision,

the Finance Board intends to transition itself out of, and the Banks

into, the debt issuance function under the provisions of section 11(a)

of the Bank Act as soon as practicable.

C. CO Issuance--Proposed Amendments to Part 910

1. Definitions

The proposed rule would delete Secs. 910.0(a) and (b), the

definitions of the terms ``Board'' and ``Bank,'' which have been

proposed to be defined for all Finance Board regulations in a previous

rulemaking, see 64 FR 52148 (Sept. 27, 1999), and the definition of the

term ``unsecured senior liabilities'' in Sec. 910.0(d). The proposed

rule would amend the definition of the term ``consolidated obligation''

to clarify that it includes bonds, notes or debentures issued by the

Banks through the OF under section 11(a) of the Bank Act. The proposed

rule also would add a new Sec. 910.1(b) to define the term ``Nationally

Recognized Statistical Rating Organizations.''

2. Section 910.2

Proposed Sec. 910.2(a) sets forth the types of liabilities

authorized for Bank business operations. It is intended to be an

exclusive list and the Banks' sole liability authority, replacing the

[[Page 328]]

Funding Guidelines section of the FMP. The Funding Guidelines of the

FMP, which set forth the parameters for the use by the Banks of

alternative sources and structures in funding their activities, are

proposed to be deleted in a separate notice published elsewhere in this

Federal Register, See FMP sec. IV. The Funding Guidelines differentiate

between Bank specific liabilities and COs, which are the joint-and-

several liabilities of the Banks. See id. at secs. IV.B. and C.

Under the FMP, authorized Bank specific liabilities generally

include: (1) Deposits from members, from any institution for which a

Bank is providing correspondent services, from another Bank, and from

other instrumentalities of the United States; (2) federal funds

purchased from any financial institution that participates in the

federal funds market; and (3) repurchase agreements, with the provision

that those requiring the delivery of collateral by a Bank may be only

with Federal Reserve Banks, U.S. government sponsored agencies and

instrumentalities, primary dealers recognized by the Federal Reserve

Bank of New York, eligible financial institutions,\15\ and states and

municipalities with a Moody's Investment Grade rating of 1 or 2.

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\15\ Eligible financial institutions include banks and Federal

Deposit Insurance Corporation (FDIC) insured financial institutions,

including U.S. subsidiaries of foreign commercial banks, whose most

recently published financial statements exhibit at least $100

million of Tier I (or tangible) capital if the institution is a

member of the investing Bank or at least $250 million of tangible

capital for all other FDIC-insured institutions, and which have been

rated at least a level III institution as defined in section VI.C of

the FMP.

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The FMP also prohibits a Bank from directly placing COs with

another Bank. See id. at sec. IV.C.4.

The proposed rule would incorporate certain provisions of section

IV of the FMP into regulation. Proposed Sec. 910.2(a)(1) sets forth

each Bank's authority to act as a joint-and-several obligor with other

Banks on COs, as authorized under part 910. Proposed Sec. 910.2(a)(2)

continues each Bank's authority to accept deposits from members, other

Banks and instrumentalities of the United States, but provides that the

deposit transaction may not be conducted in such a way as to result in

the offer or sale of a security in a public offering as those terms are

used in 15 U.S.C. 77b(3). In addition, recognizing the importance of

federal funds and repurchase agreements for the Banks' liquidity

management, proposed Sec. 910.2(a)(3) allows a Bank to purchase federal

funds and enter into repurchase agreements, but only in order to

satisfy the Banks' short-term liquidity needs.

Proposed Sec. 910.2(b) would retain the substance of existing

Sec. 910.1(a) concerning COs to be issued by the Finance Board through

the OF, but would expressly provide that the Finance Board may

terminate the delegation of authority to the OF to issue COs on behalf

of the Finance Board pursuant to section 11(c) of the Bank Act.

Proposed Sec. 910.2(b) and (c) continue the existing prohibition on

directly placing COs with another Bank. It is the opinion of the

Finance Board that such placements do not further the mission of the

Bank System. Proposed Sec. 910.2(c) would expressly authorize the OF to

undertake the issuance of joint Bank debt pursuant to section 11(a) of

the Bank Act as COs on which all of the Banks are jointly and severally

liable subject to Sec. 910.8, which governs the joint-and-several

liability of the Banks on COs issued under section 11(c) of the Bank

Act.

The proposed rule does not include the 20-to-1 leverage limit from

Sec. 910.1(b) of the existing regulations, or the 20-to-1 leverage

limit on each Bank contained in the FMP. Instead, as discussed in

detail in the Notice published elsewhere in this issue of the Federal

Register, the Finance Board is proposing to amend the FMP to require

each Bank to have and maintain total capital in an amount equal to at

least 4.76 percent of the Bank's total assets.

Neither the elimination of the System-wide leverage limit from the

Finance Board's regulations, nor the proposed revision to the leverage

limit contained in the FMP, would have any practical effect on the Bank

System or its bondholders. The Finance Board, as the regulator of the

Banks, would continue to monitor each Bank for compliance with the

individual leverage limit included in the FMP. The current FMP

prohibits a Bank from participating in COs if such transactions would

cause the Bank's liabilities to exceed 20 times the Bank's total

capital. The proposed revision to the FMP establishes an equivalent

leverage standard, stated as a percentage of assets, which would

require each Bank to maintain capital of at least 4.76 percent of its

total assets. The imposition of this standard on each Bank will ensure

that the Bank System itself stays within the leverage limit, rendering

any retention of a Bank System-wide leverage limit unnecessary.

Further, the Finance Board notes that with the recent passage of the

Gramm-Leach-Bliley Act, Banks will be subject to statutory leverage

limits and risk-based capital requirements. When implemented, the new

risk-based capital regime will provide an additional safeguard to the

Bank System and its bondholders by requiring Banks to hold capital in

proportion to the risks they assume.

As discussed above, the Finance Board, by incorporating COs issued

by the Banks under section 11(a) of the Bank Act into the definition of

the term ``consolidated obligations'' in part 910, intends that the

provisions of Sec. 910.8 pertaining to the joint-and-several liability

of the Banks on COs shall apply to such debt because it enhances

investor confidence in Bank System debt, and promotes the liquidity of

the bonds.

Proposed Sec. 910.2(d) amends existing Sec. 910.1(c), the negative

pledge requirement, by requiring each Bank to at all times maintain the

assets listed in an amount at least equal to the Bank's pro rata share

of the outstanding COs issued by the OF on behalf of the Finance Board

under section 11(c) and the COs issued by the OF on behalf of the Banks

under section 11(a) in which the Bank participated for purposes of the

negative pledge requirement. The proposed rule retains the negative

pledge requirement for debt previously issued by the OF on behalf of

the Finance Board under section 11(c), and expressly requires each Bank

to maintain the specified assets free of pledge in an amount equal to

the Bank's pro rata share in COs issued by the OF on behalf of the

Banks under section 11(a) in which the Bank participated. In connection

with these proposed amendments, it is the intention of the Finance

Board to preserve the existence of the special asset accounts at the

Banks established when the leverage limit in current part 910 was

raised in 1992 from 12-to-1 to 20-to-1. See Finance Board Res. No. 92-

751 (Dec. 21, 1992). The Finance Board has maintained these

requirements in the proposal to cause the least amount of change

possible to the current structure and thereby avoid disruptions of the

market. The Finance Board invites comment on this provision.

3. Sections 910.3 Through 910.7

Sections 910.3 through 910.6 are retained, as amended, by

substituting ``Finance Board'' for ``Board,'' ``Bank'' for ``Federal

home Loan Bank,'' and ``consolidated obligation'' for ``consolidated

bond.'' Current Sec. 910.6(b)(2), which purports to impose limitations

on the Finance Board's ability to change the leverage limit provision

in current Sec. 910.6(b), provides that current Sec. 910.1(b) may be

changed by the Finance Board if the Finance Board receives either: (1)

Written

[[Page 329]]

evidence from at least one major nationally recognized securities

rating agency that the proposed change will not result in the lowering

of that rating agency's then-current rating or assessment on senior

bonds outstanding or next to be issued; or (2) a written opinion from

an investment banking firm that the proposed change would not have a

materially adverse effect on the creditworthiness of senior bonds

outstanding or next to be issued. While the Finance Board will continue

to consult with the ratings agencies to preserve the triple-A rating of

Bank System COs, this provision is proposed to be deleted along with

the rest of the existing Sec. 910.6.

Proposed Sec. 910.7 provides the conditions under which the OF

Board of Directors may authorize the issuance of COs: the OF Board of

Directors shall authorize the offering for current and forward

settlement (not to exceed 12 months) or the reopening of COs as

necessary and authorize the maturities, rates of interest, terms and

conditions (subject to the provisions of 31 U.S.C. 9108) under certain

conditions, including the restriction that COs may be offered for sale

only to the extent that the Banks are committed to take the proceeds,

the OF Board of Directors shall implement investor suitability

standards and adopt a policy addressing the relationship between the

Banks and their members as debt issuers.

D. Powers, Duties, Responsibilities and Functions of the OF--Amendments

to Part 941

1. Section 941.1--Definitions

The definitions in Sec. 941.1 are proposed to be revised as

follows: the term ``Office of Finance'' becomes ``OF'' in the heading

and is added as a defined term; the term ``OF Board of Directors'' is

revised to mean the 24 member administrative body responsible for the

oversight of management of the OF; the terms ``Chief Executive

Officer'' and ``OF Operations Imprest Fund'' are added as new defined

terms. The definition of the term ``consolidated obligation'' is made

consistent with the proposed definition in Sec. 910.1(a). The

definitions of the terms ``Finance Board,'' ``Bank,'' and ``Bank Act''

which have been proposed to be defined for all Finance Board

regulations in a previous rulemaking, see 64 FR 52148 (Sept. 27, 1999),

and the definition of the term ``Director'' are deleted.

2. Section 941.2--Powers and Responsibilities of the OF

Proposed Sec. 941.2(a) states that the OF is a joint office of the

Banks under section 2B of the Bank Act. See 12 U.S.C. 1422b(b)(2).

Proposed Sec. 941.2(b) sets out the broadened purpose of the OF: to

facilitate the accomplishment of the mission of the Banks as set forth

in section 2A of the Bank Act. Id. 1422a(3)(A)(ii) and (iii). As a part

of its purpose to further the mission of the Banks, proposed

Sec. 941.2(b)(1) expressly provides that the OF shall issue COs on

which the Banks shall be jointly and severally liable, on behalf of the

Banks and the Finance Board under sections 11(a) and 11(c) of the Bank

Act, respectively. Id. 1431(a) and (c). The second prong of the OF's

purpose is to support the Banks upon the request of two or more Banks

undertaking joint asset activities that the Banks are otherwise

authorized by law to undertake individually.

Proposed Sec. 941.2(c) sets out the functions the OF is authorized

to undertake in support of the issuance of debt and the support to be

provided to Banks engaged in joint asset activities. Proposed

Sec. 941.2(c)(1) contains the specific parameters related to issuance

and servicing of COs: conducting negotiations relating to the offering

and sale of COs and other obligations of the Banks, and promoting

market discipline and making timely payments on the COs. Proposed

Sec. 941.2(c)(1)(iii) requires the OF to offer, issue and service COs

effectively and at the lowest all-in funding costs over time, with due

regard for prudent risk-management practices, prudential debt

parameters, short-and long-term market conditions, the cooperative

nature of the Bank System, and the Banks' role as government-sponsored

enterprises. The proposed rule further provides that such debt shall be

issued consistent with maintaining reliable access to the short-term

and long-term capital markets, by positioning the issuance of debt to

take advantage of current and future capital market opportunities, and

requires the OF to define and maintain appropriate investor suitability

standards. In considering the cooperative nature of the Bank System,

the OF specifically must take into account the relationship between the

Banks as debt issuers, and the members of the Bank System as retail

issuers of debt, such as certificates of deposit, and the potential for

competition between the Banks and their members.

As discussed, the OF currently issues debt on behalf of the Finance

Board. The Finance Board annually adopts a debt-issuance authorization

to the OF that includes parameters to which the debt must conform. If

the Banks are authorized to issue joint debt under section 11(a) of the

Bank Act, as proposed, the annual Finance Board authorization,

including the parameters to which debt must conform, would no longer be

required. However, the Finance Board continues to be responsible for

ensuring that the Banks are able to raise funds in the capital markets.

See 12 U.S.C. 1422a(a)(3)(B)(iii). Accordingly, the proposed rule

requires the OF Board of Directors to implement policies to access debt

markets according to an efficient and managed process that establishes

prudent debt parameters and risk-management practices. In particular,

this will involve establishing policies that may temporarily prevent a

Bank from accessing the capital markets or prevent a Bank from issuing

a specific type of security. In addition, the proposed rule requires

the OF to adopt, implement and maintain investor suitability standards.

As a part of its CO issuance function, proposed Sec. 941.2(c) would

assign to the OF the function of preparing the combined Bank System

annual and quarterly financial reports (financial reports). Proposed

Sec. 941.2(c)(1)(iv) would codify current Finance Board policy (Finance

Board Res. No. 98-27 (June 24, 1998)) and set forth the standards under

which the OF must prepare the financial reports, including requiring

that the scope, form and content of the disclosure contained in such

financial reports generally be consistent with the requirements of the

SEC's Regulations S-K (specific narrative disclosure requirements) and

S-X (accounting and financial statement disclosure requirements) (17

CFR parts 229 and 210) and be presented in accordance with the

Statement Of Financial Accounting Standards No. 131, ``Disclosures

about Segments of an Enterprise and Related Information'' (FAS 131).

While the FAS 131 standard only applies to public business enterprises,

and not, therefore, to a government-sponsored enterprise such as the

Bank System, the Finance Board continues to believe that presentations

resulting from compliance with FAS 131, with each Bank presented as a

separate segment, provide useful information to bondholders and Bank

members.

Proposed Sec. 941.2(c)(1)(iv)(C) references an Appendix to the

proposed rule that lists exceptions to the standards set forth in

Sec. 941.2(c)(1)(iv)(A) and (B). These exceptions stem from the Finance

Board's belief that the general standards may include disclosure

requirements that are inapplicable to, or inappropriate for, the Bank

System. The list of exceptions is similar to that contained in the

Finance Board's Policy

[[Page 330]]

Statement, and includes certain disclosures concerning related-party

transactions, biographical information, compensation, submission of

matters to a vote of shareholders, exhibits, per-share information and

beneficial ownership. Exceptions relating to derivatives and the filing

schedule for financial reports that are included in the Finance Board's

Policy Statement have been omitted from the Appendix since the Finance

Board intends the SEC standard to be met in each case. The Appendix

also expands the list of persons required to provide biographical

information to include members of the OF Board of Directors, in

recognition of the increased role assigned to that body by the proposed

reorganization of the OF.

References to the ``managing director of the OF'' in the Policy

Statement have been changed to the ``Chief Financial Officer of the

OF'' in the Appendix.

Proposed Sec. 941.2(c)(1)(iv)(D) provides that the OF will file and

distribute combined Bank System financial reports according to a

schedule that mirrors the filing requirements applicable to corporate

registrants under the 1934 Act (i.e., annual reports within 90 days

after the end of the fiscal year and quarterly reports within 45 days

after the end of each of the first three fiscal quarters). The Finance

Board believes that, just as disclosure concerning the Bank System

should conform to industry standards, so too should the Bank System

provide that information to interested parties within the timeframes

applicable in the industry. Proposed Sec. 941.2(c)(1)(iv)(D) would

require the OF to distribute financial reports to each Bank member

according to the same schedule to ensure prompt dissemination of

relevant information. Proposed Sec. 941.2(c)(1)(iv)(E) expressly

confirms the Finance Board's sole authority to determine compliance

with the standards of part 941, while proposed Sec. 941.2(c)(1)(iv)(F)

provides an explicit compliance mechanism by requiring the OF to

promptly comply with any Finance Board directive pertaining to the

preparation, filing, amendment or distribution of financial reports.

Proposed Secs. 941.2(c)(1)(v), (vi) and (vii) obligate the OF to

stay informed on issues and developments relating to capital markets

and COs, and to pass relevant information along to the Banks. Proposed

Sec. 941.2(c)(1)(v) expressly requires the OF to provide capital

markets information concerning debt to the Banks. Proposed

Sec. 941.2(c)(1)(vi) provides that the OF shall manage relationships

with Nationally Recognized Statistical Rating Organizations (NRSROs) in

connection with the NRSRO's ratings of COs, while Sec. 941.2(c)(1)(vii)

allows the OF to conduct research reasonably related to the issuance or

servicing of COs. These functions are intended to allow the OF to serve

as a centralized repository for information supporting the issuance of

COs for the benefit of the Bank System.

3. Joint Asset Activity Management

The Finance Board has determined that the Banks have incidental and

investment authority to undertake certain lending programs with their

members whereby a Bank may purchase or fund mortgages originated by

members, subject to certain conditions. On October 4, 1999, the Finance

Board adopted Resolution Number 99-50, which authorized the Banks to

``establish and operate Member Mortgage Assets programs, a generic

designation for programs that efficiently allocate mortgage risks so as

to best use the core competencies of the entities involved, provide

appropriate capital treatment to the participating financial

institution members, and provide capital market funding and risk

management alternatives, all for the ultimate benefit of consumers.''

See Finance Board Res. No. 99-50 (Oct. 4, 1999); see also 64 FR 60448

(Nov. 5, 1999). Finance Board Resolution Number 99-50 also includes the

terms and conditions applicable to the operation of member mortgage

assets programs. See Finance Board Res. No. 99-50 at 2.

These are not the only potential joint asset activities that the

Banks may choose to conduct. Certain advance participation programs or

investments, liquidity management and investments in housing finance

agency bonds present potential for joint activity among the Banks.

Any joint asset activities in which the Banks may engage may be

most efficiently administered on a joint basis through a central

facility. Administering joint assets through a centralized facility

offers the added safety and soundness benefits of better risk-

management capabilities and geographic diversity in the portfolio. The

latter is particularly important given the national nature of the

mortgage markets. This is an issue the Finance Board will continue to

study as this product develops and business therein increases.

Proposed Sec. 941.2(c)(2) is intended to authorize the OF, as the

only statutorily recognized joint office of the Banks, to operate in

the above capacity. It provides that, to the extent requested by two or

more Banks pursuant to any agreement or contract, the OF shall

facilitate or provide services to the Banks in connection with any Bank

joint asset activities authorized by law. With regard to the joint

asset activities of the Banks, the OF would be required to provide

administrative and technical support for the origination, purchase,

management, servicing or sale of any asset owned by one or more Banks

pursuant to any contract, including member mortgage assets; provide

market information to the Banks concerning member mortgage assets and

other assets or investments of the Banks; conduct and provide research

on such assets and investments; develop effective systems to monitor

credit exposure and manage counter-party risk; adopt procedures to

assist the Banks in managing their liquidity; and adopt procedures to

facilitate the inter-Bank sale of participation interests in advances

and investments. This section does not require the Banks to make use of

the OF in this capacity, but it does require the OF to provide the

services outlined if two or more Banks wish the OF to do so. The OF

may, of course, establish a reasonable fee structure or charge for its

services by contract or otherwise. It also may mediate among competing

Bank demands, in accordance with its specified duties and

responsibilities.

Proposed Sec. 941.2(c)(3) provides that, in accordance with

policies and procedures established by the OF Board of Directors, the

OF shall perform such duties and responsibilities for the Financing

Corporation (FICO) or the Resolution Funding Corporation (REFCorp) on

behalf of the Banks, as may be required. This section preserves a

current function of the OF as set forth in Sec. 941.5(b).

Proposed Sec. 941.2(d) provides that the OF may contract with a

Bank or Banks for the use of Bank facilities or personnel in order to

perform its functions, which is currently set forth in Sec. 941.7(b).

4. Finance Board Oversight

Proposed Sec. 941.3 provides that the Finance Board shall retain

the same regulatory oversight authority and enforcement powers over the

OF, the OF Board of Directors, the directors, officers, employees,

agents, attorneys, accountants or other OF staff, as it has over a Bank

and its respective board members, officers, employees, attorneys,

accountants, agents or other staff, which is broader than the existing

provision. The proposed rule deletes Sec. 941.3(a), which states that

the activities of the OF are subject to the approval of the Finance

Board. The Finance Board believes that Sec. 941.3 should be amended to

expressly state the Finance Board's

[[Page 331]]

supervisory role in the proposed expanded functions of the OF.

Additionally, the proposed rule states that, pursuant to Section 20 of

the Bank Act, 12 U.S.C. 1440, the Finance Board shall examine the OF,

all funds and accounts that may be established pursuant to this part,

and the operations and activities of the OF, as provided for in the

Bank Act or any regulations promulgated pursuant thereto. This is

somewhat broader in scope than the provisions of existing Sec. 941.3.

E. Organizational Structure--Amendments to Part 941

1. Section 941.4--the OF Board of Directors

Current Sec. 941.7(c) establishes an OF board of directors composed

of three members, two Bank presidents and one private citizen with

demonstrated expertise in financial markets, all appointed by the

Finance Board. This structure has served the OF and the Bank System

while the OF's only functions have been to issue COs on behalf of the

Finance Board and make CO principal and interest payments when due on

behalf of the Banks. The proposed rule contemplates that the OF will

undertake additional, varied responsibilities that would require

broader oversight by a board of directors possessing a wide range of

financial sector credentials. Accordingly, proposed Sec. 941.4(a) would

change the size and composition of the OF Board of Directors to reflect

the proposed expanded duties and functions of the OF. As revised, the

OF Board of Directors would consist of 24 individuals, 6 of whom would

be appointed by the Finance Board, 6 of whom would be elected by Bank

System members, and 12 of whom would be appointed by the Banks. The

Finance Board acknowledges that the size of the proposed OF Board of

Directors may seem unwieldy to some. The ratio and balance among Bank

representatives, System representatives and representatives of the

public is the principle most important to the Finance Board in this

provision. The quest to achieve the proper balance while providing

every Bank a seat and a role for members and the public on the OF Board

of Directors, leads to the number proposed. The Finance Board seeks

comment on and suggestions for alternative structures that might be

more workable in terms of number that that would still maintain the

appropriate mix and balance of representation on the OF Board of

Directors. For instance, if less than 12 Banks were to be represented

on the OF Board of Directors at any one time, the regulation could

provide for rotating Bank representation, or the elimination of the

requirement for an Executive Committee.

Under proposed Sec. 941.4(a)(1), directors appointed by the Finance

Board would have to be U.S. citizens with demonstrated experience in

financial markets or asset management, and could not be affiliated with

any Bank or broker-dealer under contract with the OF. The proposed rule

establishes no other eligibility criteria for Finance Board appointees

to the OF Board. This differs from the appointment standards for public

interest directors of the Banks, which require that two out of six

Finance Board appointees represent consumer or community interest

organizations, and prohibit any Finance Board appointee from serving as

an officer of a Bank, or as an officer or director of any member of a

Bank, or from holding shares or any other financial interest in any

member, during his or her tenure as a Bank director. See 12 U.S.C.

1427(a). The absence of such restrictions for OF Board appointees in

the proposed rule is intended to provide the Finance Board with maximum

flexibility in selecting persons it believes would best assist the OF

in fulfilling its mission. However, the Finance Board seeks comment on

whether the qualifications and restrictions applicable to appointed

Bank directors, or any others, should be included in the proposed rule

for Finance Board appointees to the OF Board.

Under proposed Sec. 941.4(a)(2), a director appointed by a Bank

must be an officer, employee, or director of the Bank. Pursuant to

proposed Sec. 941.4(a)(3), Bank System members would elect six

directors (two each year) through annual elections conducted by the OF.

Under proposed Sec. 941.4(a)(3)(i), to be eligible for a directorship,

nominees of members would have to be U.S. citizens with demonstrated

experience in financial markets or asset management, and could not be

associated with a broker-dealer under contract with the OF. A Bank

System member and its affiliates could not have more than one

representative on the OF Board of Directors at any time.

Proposed Sec. 941.4(a)(3)(ii) provides that each member of the Bank

System is entitled to nominate an eligible person for service on the OF

Board in each annual election. From such nominees, two member-elected

directorships would be filled each year by a plurality vote of Bank

System members. Each member would be permitted to cast a number of

votes equal to the number of shares of stock in such Bank the member

held at the end of the calendar year preceding the election, without

any limitation, including limits that would apply to voting in director

elections under section 7(b) of the Bank Act. See 12 U.S.C. 1427(b).

Under proposed Sec. 941.4(a)(3)(iii), the OF would prepare nomination

forms and transmit them to Bank System members no later than March 1st

of the election year. The nomination forms would state the director

eligibility requirements and restrictions. Members would have not less

than 30 calendar days to submit the nomination forms to the OF, which

would create acceptance and certification of eligibility forms and

provide them to the nominees no later than May 1st of the election

year. The nominees would have 30 days to accept or decline the

nomination and provide the written eligibility certification to the OF.

Under proposed Sec. 941.4(a)(3)(iv), the OF would prepare a ballot

for the OF Board of Directors election to be used in each Bank district

based on the acceptance and certification forms, and provide the ballot

to the Banks not later than July 1st of the election year. The Banks

would be required to transmit the ballot to their members with the

election ballots for the election of the Banks' respective boards of

directors. Bank System members would have a minimum of 30 days to vote

and return the OF Board of Directors election ballot to the OF. The OF

would tabulate the ballots and announce the slate of the OF Board of

Directors no later than November 1st of the election year.

Proposed Sec. 941.4(b) provides that the directors' terms would be

three years, and that initial terms would be staggered so that \1/3\ of

the terms expire each year. Under proposed Sec. 941.4(c), appointed

directorship vacancies would be filled in the manner in which the

appointment was originally made, while elected directorship vacancies

would be filled by majority vote of the remaining OF Board of

Directors. A director appointed or elected to fill a vacancy would

serve the remainder of the original term. Proposed Sec. 941.4(d), which

sets forth the means of selection and duties of the Chair and Vice

Chair of the OF Board of Directors, contains all of the substantive

provisions of current Sec. 941.7(e).

Proposed Sec. 941.4(e), ``Compensation,'' replaces the multiple

provisions of current Sec. 941.7(f) with a single standard that permits

members of the OF Board of Directors to receive compensation and

reimbursement for expenses incurred as a result of their service on the

OF Board of Directors.

[[Page 332]]

Proposed Sec. 941.4(f) is a new section that requires the OF Board

of Directors to establish an audit committee consistent with the

requirements set forth in part 917 (which is being proposed in a

separate notice of proposed rulemaking); an executive committee

comprised of member-elected directors, Bank-appointed directors, and

Finance Board-appointed directors, each represented in the same

proportions as they are on the full OF Board of Directors; and a

committee to coordinate the issuance and servicing of COs under part

910. The proposed rule provides authority for the OF Board of Directors

to establish additional committees as necessary and appropriate to

carry out the Board's duties and responsibilities. Additionally, the OF

Board of Directors is required to promulgate policies and define

respective roles and duties of any committees so established, which

shall be binding upon such committees.

Proposed Sec. 941.4(g) is a new section that sets the quorum

requirement for meetings of the OF Board of Directors and meetings of

committees of the OF Board of Directors at a simple majority of the

total directorships on the OF Board of Directors or the committee.

2. Section 941.5--Powers of the OF Board of Directors

Proposed Sec. 941.5, ``Powers of the OF board of directors,''

incorporates and revises the provisions of current Sec. 941.8. As is

true in Sec. 941.8(a) of the current rule, proposed Sec. 941.5(a)

provides that the OF Board of Directors shall have the incidental

powers under section 12(a) of the Bank Act as are necessary, convenient

and proper to accomplish the efficient operation and management of the

OF. Also, as is true under Sec. 941.8(b) of the current rule, proposed

Sec. 941.5(b) expressly empowers the OF Board of Directors to act as

the agent of the Finance Board in issuing COs pursuant to section 11(c)

of the Bank Act. It also empowers the OF Board of Directors to act as

agent for the Banks in issuing COs pursuant to section 11(a) of the

Bank Act and in making principal and interest payments on COs issued by

either entity.

Proposed Sec. 941.5(c) preserves the authority of the OF Board of

Directors to delegate powers to OF staff to carry out OF functions, and

proposed Sec. 941.5(d) retains the indemnification powers currently

provided in Sec. 941.8(d).

3. Section 941.6--Duties of the OF Board of Directors

Proposed Sec. 941.6, ``Duties of the OF board of directors'' would

substantially revise the provisions of current Sec. 941.9. Proposed

Sec. 941.6(a) retains intact the provisions of current Sec. 941.9(a),

which provides that the OF Board of Directors shall adopt bylaws,

consistent with applicable laws and regulations as administered by the

Finance Board, governing its operation and issue such guidance or

instruction as will promote the efficient operation of the OF and that

the OF Board of Directors shall conduct its business by majority vote

of its members convened at a meeting in accordance with its bylaws.

Proposed Sec. 941.6(b) enumerates the oversight responsibilities of

the OF Board of Directors. Importantly, proposed Sec. 941.6(b)(2)

requires the OF Board of Directors to set policies for management of

the OF, in particular a policy in connection with the issuance of debt

that would take into account the cooperative nature of the Bank System,

and the relationship of the Banks as issuers of debt to their members

as issuers of debt. Proposed Sec. 941.6(b) also requires the OF Board

of Directors to be responsible for the conduct and performance of all

duties, functions, operations and activities of the OF and for its

efficient and effective operation; approve a strategic business plan

for the OF and monitor the progress of its operations under such plan;

review, adopt, and monitor the annual operating budget of the OF

including any supplemental expenditure thereto; provide oversight for

the OF Board of Directors committee charged with directing the issuance

of COs; develop and implement the pricing mechanism by which the OF

will make private or public offerings of COs, subject to the

requirements of part 910; select, employ and define the duties of a

Chief Executive Officer of the OF (CEO), provided that the CEO, or his

designee, shall be the Fiscal Agent of the Banks, a member of the

Directorate of the Financing Corporation, pursuant to section

21(b)(1)(A) of the Bank Act, 12 U.S.C. 1441(b)(1)(A), and a member of

the Directorate of the Resolution Funding Corporation, pursuant to

section 21B(c)(1)(A) of the Bank Act, 12 U.S.C. 1441b(c)(1)(A).

Additionally, the OF Board of Directors would be required to approve

all contracts of the OF, and assume any other responsibilities that may

from time to time be delegated to it by the Finance Board. The proposed

rule also expressly provides that the OF Board of Directors would be

subject to and required to operate in accordance with Finance Board

policies and regulations applicable to the boards of directors of the

Banks, including proposed part 917.

Proposed Sec. 941.7 incorporates and revises the provisions of

current Sec. 941.11. It retains the requirement of current

Sec. 941.11(f) that the Banks are responsible for jointly funding the

OF. Under the proposed rule, at the direction of and pursuant to

policies and procedures adopted by the OF Board of Directors, the Banks

are required periodically to reimburse the OF Operations Imprest Fund

to maintain in such fund an amount approved by the OF Board of

Directors sufficient to fund the operations of the OF under a budget

approved by the OF Board of Directors. Each Bank's respective pro rata

share of the reimbursement must be based on the ratio of the total

paid-in value of its capital stock relative to the total paid-in value

of all capital stock in the Bank System. The proposed rule provides new

authority for the OF Board of Directors, with the prior approval of the

Finance Board, to devise an alternative formula for determining each

Bank's respective share of the OF expenses or, by contract with a Bank

or Banks, may choose to be reimbursed through a fee structure in lieu

of or in addition to assessment, for services provided to the Bank or

Banks for the issuance or servicing of COs or the management and

administration of joint asset activities.

Proposed Sec. 941.8 retains the savings clause contained in current

Sec. 941.12, which provides that all actions taken by the OF as it

existed prior to these amendments will continue to be valid as regards

the Finance Board and the Bank System. The rest of the provisions of

current Sec. 941.12 are not included in the proposed rule as they are

obsolete and no longer necessary.

IV. Regulatory Flexibility Act

The proposed rule applies only to the Banks, which do not come

within the meaning of small entities as defined in the Regulatory

Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance

with section 605(b) of the RFA, 5 U.S.C. 605(b), the Finance Board

hereby certifies that this proposed rule, if promulgated as a final

rule, will not have significant economic impact on a substantial number

of small entities.

V. Paperwork Reduction Act

This proposed rule does not contain any collections of information

pursuant to the Paperwork Reduction Act of 1995. See 33 U.S.C. 3501 et

seq. Therefore, the Finance Board has not submitted any information to

the Office of Management and Budget for review.

[[Page 333]]

List of Subjects

12 CFR Part 900

Organization and functions (Government agencies).

12 CFR Part 910

Banks, Consolidated bonds and debentures, Federal home loan banks,

Securities.

12 CFR Part 941

Consolidated bonds and debentures, Federal home loan banks,

Organization and functions (Government agencies), Securities.

For the reasons stated in the preamble, the Finance Board proposes

to amend 12 CFR parts 900, 910 and 941 as follows:

PART 900--DESCRIPTION OF ORGANIZATION AND FUNCTIONS

1. The authority citation for part 900 continues to read as

follows:

Authority: 5 U.S.C. 552; 12 U.S.C. 1422b(a) and 1423.

2. Amend Sec. 900.30 to add a new paragraph (a)(3) to read as

follows:

Sec. 900.30 Office of Finance Board of Directors.

(a) * * *

(3) The authority delegated under paragraphs (a)(1) and (2) of this

section expires on December 31, 2000, unless otherwise extended or

modified by the Finance Board.

* * * * *

3. Revise part 910 to read as follows:

PART 910--CONSOLIDATED OBLIGATIONS

Sec.

910.1 Definitions.

910.2 Authorized liabilities; Issuance of consolidated obligations.

910.3 Form of consolidated obligations.

910.4 Transactions in consolidated obligations.

910.5 Lost, stolen, destroyed, mutilated or defaced consolidated

obligations.

910.6 Administrative provision.

910.7 Conditions for issuance of consolidated obligations.

910.8 Joint and several liability.

Authority: 12 U.S.C. 1422a, 1422b and 1431.

Sec. 910.1 Definitions.

For purposes of this part:

(a) Consolidated obligations or CO means any bond, debenture, or

note issued jointly by the Banks pursuant to section 11(a) of the

Federal Home Loan Bank Act (Act), as amended (12 U.S.C. 1431(a)), or

any bond or note issued by the Finance Board on behalf of all Banks

pursuant to section 11(c) of the Act (12 U.S.C. 1431(c)), on which the

Banks are by statute or regulation jointly and severally liable.

(b) NRSRO means a credit rating organization regarded as a

Nationally Recognized Statistical Rating Organization by the Securities

and Exchange Commission.

(c) Senior bonds means COs issued pursuant to section 11 of the Act

and this part and not defeased, other than bonds specifically

subordinated to any then outstanding COs.

Sec. 910.2 Authorized liabilities; Issuance of consolidated

obligations.

(a) Authorized liabilities. As a source of funds for business

operations, each Bank is authorized to incur liabilities only by:

(1) Acting as joint and several obligor with other Banks on

consolidated obligations, as authorized under this part;

(2) Accepting time or demand deposits from members or any

institution for which the Bank is providing correspondent services,

other Banks, and instrumentalities of the United States, so long as the

deposit transaction is not conducted in such a way as to result in the

offer or sale of a security in a public offering as those terms are

used in 15 U.S.C. 77b(3); or

(3) Solely in order to satisfy the Bank's short-term liquidity

needs, by:

(i) Purchasing federal funds; and

(ii) Entering into repurchase agreements.

(b) Consolidated obligations issued by the Finance Board. The

Finance Board may issue consolidated obligations under section 11(c) of

the Act (12 U.S.C. 1431(c)), including the determination of the dates

of issue, maturities, rates of interest, terms and conditions thereof,

and the manner in which such consolidated obligations shall be issued,

subject to the provisions of 31 U.S.C. 9108. The Finance Board in its

discretion may delegate this responsibility, or terminate such

delegation. Consolidated obligations issued under this paragraph shall

not be directly placed with any Bank.

(c) Consolidated obligations issued by the Banks. (1) Pursuant to

the Banks' housing finance mission set forth in section 2A(a)(3)(B)(ii)

of the Act (12 U.S.C. 1422a(a)(3)(B)(ii)), pursuant to the Finance

Board's duty to ensure that the Banks carry out that mission and remain

adequately capitalized and able to raise funds in the capital markets

under section 2A(a)(3)(B)(ii) and (iii) of the Act (12 U.S.C.

1422a(a)(3)(B)(ii) and (iii)), and subject to such rules, regulations,

terms and conditions as the Finance Board may prescribe, the Banks are

authorized to issue joint debt under section 11(a) of the Act (12

U.S.C. 1431(a)), which shall be called consolidated obligations and on

which the Banks shall be jointly and severally liable under Sec. 910.7.

(2) Consolidated obligations shall be issued through the Office of

Finance, as agent of the Banks pursuant to this part 910.

(3) Consolidated obligations issued under this paragraph (c) shall

not be directly placed with any Bank.

(d) Negative pledge requirement. Each Bank shall at all times

maintain assets described in paragraphs (d)(1) through (d)(6) of this

section free from any lien or pledge, in an amount at least equal to a

pro rata share of the total amount of currently outstanding

consolidated obligations jointly issued by the Banks pursuant to

section 11(a) of the Act (12 U.S.C. 1431(a)) and by the Finance Board

pursuant to section 11(c) of the Act (12 U.S.C. 1431(c)) equal to such

Bank's participation in all such COs outstanding provided that any

assets that are subject to a lien or pledge for the benefit of the

holders of any issue of consolidated obligations shall be treated as if

they were assets free from any lien or pledge for purposes of

compliance with this paragraph (d). Eligible assets are:

(1) Cash;

(2) Obligations of or fully guaranteed by the United States;

(3) Secured advances;

(4) Mortgages as to which one or more Banks have any guaranty or

insurance, or commitment therefore, by the United States or any agency

thereof;

(5) Investments described in section 16(a) of the Act (12 U.S.C.

1436(a)); and

(6) Other securities that have been assigned a rating or assessment

by an NRSRO that is equivalent to or higher than the rating or

assessment assigned by an NRSRO to consolidated obligations

outstanding.

Sec. 910.3 Form of consolidated obligations.

Consolidated obligations shall be issued in series and all

consolidated obligations of the same series shall be of like date,

tenor, and effect except as to denominations, which shall be in such

amounts as may be authorized by the Finance Board. The Finance Board

shall prescribe the form of each consolidated obligation. Consolidated

obligations issued with maturities of one year or less may be

designated consolidated notes.

Sec. 910.4 Transactions in consolidated obligations.

The general regulations of the Department of Treasury now or

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hereafter in force governing transactions in United States securities,

except 31 CFR part 357 regarding book-entry procedure, are hereby

incorporated into this part 910, so far as applicable and as

necessarily modified to relate to consolidated obligations, as the

regulations of the Finance Board for similar transactions on

consolidated obligations. The book-entry procedure for consolidated

obligations is contained in part 912 of this subchapter.

Sec. 910.5 Lost, stolen, destroyed, mutilated or defaced consolidated

obligations.

United States statutes and regulations of the Department of

Treasury now or hereafter in force governing relief on account of the

loss, theft, destruction, mutilation, or defacement of United States

securities, so far as applicable and as necessarily modified to relate

to consolidated obligations, are hereby adopted as the regulations of

the Finance Board for the issuance of substitute consolidated

obligations or the payment of lost, stolen, destroyed, mutilated or

defaced consolidated obligations.

Sec. 910.6 Administrative provision.

The Secretary of the Treasury or the Acting Secretary of the

Treasury is hereby authorized and empowered, as the agent of the

Finance Board and the Banks to administer Secs. 910.4 and 910.5, and to

delegate such authority at their discretion to other officers,

employees, and agents of the Department of Treasury. Any such

regulations may be waived on behalf of the Finance Board and the Banks

by the Secretary of the Treasury or the Acting Secretary of the

Treasury or by an officer of the Department of Treasury authorized to

waive similar regulations with respect to United States securities, but

only in any particular case in which a similar regulation with respect

to United States securities would be waived. The terms ``securities''

and ``bonds'' as used in this section shall, unless the context

otherwise requires, include and apply to coupons and interim

certificates.

Sec. 910.7 Conditions for issuance of consolidated obligations.

The OF Board of Directors shall authorize the offering for current

and forward settlement (up to 12 months) or the reopening of COs, as

necessary, and authorize the maturities, rates of interest, terms and

conditions thereof, subject to the provisions of 31 U.S.C. 9801 and the

following conditions:

(a) COs may be offered for sale only to the extent that Banks are

committed to take the proceeds;

(b) The OF Board of Directors shall implement investor suitability

standards; and

(c) COs may be offered for sale only pursuant to a policy adopted

by the OF Board of Directors that addresses the relationship between

the Banks as issuers of debt and their members as issuers of debt.

Sec. 910.8 Joint and several liability.

(a) In general. (1) Each and every Bank, individually and

collectively, has an obligation to make full and timely payment of all

principal and interest on consolidated obligations when due.

(2) Each and every Bank, individually and collectively, shall

ensure that the timely payment of principal and interest on all

consolidated obligations is given priority over, and is paid in full in

advance of, any payment to or redemption of shares from any

shareholder.

(3) The provisions of this part shall not limit, restrict or

otherwise diminish, in any manner, the joint and several liability of

all of the Banks on all of the consolidated obligations issued by the

Finance Board pursuant to section 11(c) of the Bank Act (12 U.S.C.

1431(c) and by one or more Banks pursuant to section 11(a) of the Bank

Act (12 U.S.C. 1431(a).

(b) Certification and reporting. (1) Before the end of each

calendar quarter, and before declaring or paying any dividend for that

quarter, the President of each Bank shall certify in writing to the

Finance Board that, based on known current facts and financial

information, the Bank will remain in compliance with the liquidity

requirements set forth in section 11(g) of the Act (12 U.S.C. 1431(g)),

and the Finance Board's Financial Management Policy or any regulations,

(as the same may be amended, modified or replaced), and will remain

capable of making full and timely payment of all of its current

obligations, including direct obligations, coming due during the next

quarter.

(2) A Bank shall immediately provide written notice to the Finance

Board if at any time the Bank:

(i) Is unable to provide the certification required by paragraph

(b)(1) of this section;

(ii) Projects at any time that it will fail to comply with

statutory or regulatory liquidity requirements, or will be unable to

timely and fully meet all of its current obligations, including direct

obligations, due during the quarter;

(iii) Actually fails to comply with statutory or regulatory

liquidity requirements or to timely and fully meet all of its current

obligations, including direct obligations, due during the quarter; or

(iv) Negotiates to enter or enters into an agreement with one or

more other Banks to obtain financial assistance to meet its current

obligations, including direct obligations, due during the quarter; the

notice of which shall be accompanied by a copy of the agreement, which

shall be subject to the approval of the Finance Board.

(c) Consolidated obligation payment plans. (1) A Bank promptly

shall file a consolidated obligation payment plan for Finance Board

approval:

(i) If the Bank becomes a non-complying Bank as a result of failing

to provide the certification required in paragraph (b)(1) of this

section;

(ii) If the Bank becomes a non-complying Bank as a result of being

required to provide the notice required pursuant to paragraph (b)(2) of

this section, except in the event that a failure to make a principal or

interest payment on a consolidated obligation when due was caused

solely by a temporary interruption in the Bank's debt servicing

operations resulting from an external event such as a natural disaster

or a power failure; or

(iii) If the Finance Board determines that the Bank will cease to

be in compliance with the statutory or regulatory liquidity

requirements, or will lack the capacity to timely and fully meet all of

its current obligations, including direct obligations, due during the

quarter.

(2) A consolidated obligation payment plan shall specify the

measures the non-complying Bank will undertake to make full and timely

payments of all of its current obligations, including direct

obligations, due during the applicable quarter.

(3) A non-complying Bank may continue to incur and pay normal

operating expenses incurred in the regular course of business

(including salaries, benefits, or costs of office space, equipment and

related expenses), but shall not incur or pay any extraordinary

expenses, or declare, or pay dividends, or redeem any capital stock,

until such time as the Finance Board has approved the Bank's

consolidated obligation payment plan or inter-Bank assistance

agreement, or ordered another remedy, and all of the non-complying

Bank's direct obligations have been paid.

(d) Finance Board payment orders; Obligation to reimburse. (1) The

Finance Board, in its discretion and notwithstanding any other

provision in this section, may at any time order any Bank to make any

principal or interest

[[Page 335]]

payment due on any consolidated obligation.

(2) To the extent that a Bank makes any payment on any consolidated

obligation on behalf of another Bank, the paying Bank shall be entitled

to reimbursement from the non-complying Bank, which shall have a

corresponding obligation to reimburse the Bank providing assistance, to

the extent of such payment and other associated costs (including

interest to be determined by the Finance Board).

(e) Adjustment of equities. (1) Any non-complying Bank shall apply

its assets to fulfill its direct obligations.

(2) If a Bank is required to meet, or otherwise meets, the direct

obligations of another Bank due to a temporary interruption in the

latter Bank's debt servicing operations (e.g., in the event of a

natural disaster or power failure), the assisting Bank shall have the

same right to reimbursement set forth in paragraph (d)(2) of this

section.

(3) If the Finance Board determines that the assets of a non-

complying Bank are insufficient to satisfy all of its direct

obligations as set forth in paragraph (e)(1) of this section, then the

Finance Board may allocate the outstanding liability among the

remaining Banks on a pro rata basis in proportion to each Bank's

participation in all consolidated obligations outstanding as of the end

of the most recent month for which the Finance Board has data, or

otherwise as the Finance Board may prescribe.

(f) Reservation of authority. Nothing in this section shall affect

the Finance Board's authority to adjust equities between the Banks in a

manner different than the manner described in paragraph (e) of this

section, or to take enforcement or other action against any Bank

pursuant to the Finance Board's authority under the Act or otherwise to

supervise the Banks and ensure that they are operated in a safe and

sound manner.

(g) No rights created. (1) Nothing in this section shall create or

be deemed to create any rights in any third party.

(2) Payments made by a Bank toward the direct obligations of

another Bank are made for the sole purpose of discharging the joint and

several liability of the Banks on consolidated obligations.

(3) Compliance, or the failure to comply, with any provision in

this section shall not be deemed a default under the terms and

conditions of the consolidated obligations.

4. Revise part 941 to read as follows:

PART 941--OPERATIONS OF THE OFFICE OF FINANCE

Sec.

941.1 Definitions.

941.2 Powers and responsibilities of the OF.

941.3 Finance Board oversight.

941.4 The OF board of directors.

941.5 Powers of the OF board of directors.

941.6 Duties of the OF board of directors.

941.7 Funding of the OF.

941.8 Savings clause.

Appendix A to Part 941--Exceptions to the General Disclosure Standards

Authority: 12 U.S.C. 1422b(a) and 1431.

Sec. 941.1 Definitions.

For purposes of this part:

(a) Bank System means the 12 Banks and the OF.

(b) Chair means the Chairperson of the OF Board of Directors.

(c) Chief Executive Officer or CEO means the Chief Executive

Officer of the OF.

(d) OF means the Office of Finance.

(e) OF Board of Directors means the 24 member administrative body

responsible for management of the OF.

(f) OF Operations Imprest Fund means the checking account

established in a financial depository institution approved by the OF

Board of Directors to fund OF operations.

Sec. 941.2 Powers and responsibilities of the OF.

(a) Joint office. The OF is a joint office of the Banks pursuant to

section 2B of the Act (12 U.S.C. 1422b(b)(2)).

(b) Purpose. The role of the OF is to facilitate the accomplishment

of the mission of the Banks set forth in section 2A of the Act (12

U.S.C. 1422a(3)(A)(ii) and (iii)) by:

(1) Exclusively offering, issuing, and servicing consolidated

obligations on behalf of the Finance Board pursuant to section 11(c) of

the Act (12 U.S.C. 1431(c)) and the Banks pursuant to section 11(a) of

the Act (12 U.S.C. 1431(a)), on which the Banks are jointly and

severally liable; and

(2) At the request of two or more Banks, by undertaking on a joint

basis activities the requesting Banks are authorized by law to

undertake individually.

(c) Functions. The OF shall have the following functions:

(1) Subject to part 910 of this chapter, with respect to

consolidated obligations, the OF shall:

(i) Conduct or facilitate negotiations relating to the public or

private offering and sale of consolidated obligations in such a manner

as to promote the cooperative nature of the Bank System and assure that

suitability standards are met;

(ii) Issue and service (including making timely payments on

principal and interest due, subject to Sec. 910.7 of this chapter)

consolidated obligations pursuant to and in accordance with the

policies and procedures established by the OF Board of Directors under

this part, which shall govern the frequency and timing of issuance,

issue size, minimum denomination, bond concessions, underwriter

qualifications, currency of issuance, interest-rate change or

conversion features, call features, principal indexing features,

selection and retention of outside counsel, selection of clearing

organizations, and the selection and compensation of underwriters for

consolidated obligations, and shall be in accordance with the mission

of the OF as set forth in Sec. 941.2 and the requirements and

limitations set forth in paragraph (c)(1)(iii) of this section;

(iii) Discharge the function described in paragraphs (c)(1)(i) and

(ii) of this section effectively and at the lowest all-in funding costs

over time, with due regard for prudent risk-management practices,

prudential debt parameters, short and long-term market conditions, the

cooperative nature of the Bank System, and the Banks' role as

government-sponsored enterprises, and, consistent with:

(A) Maintaining reliable access to the short-term and long-term

capital markets;

(B) Positioning the issuance of debt to take advantage of current

and future capital market opportunities; and

(C) Defining and maintaining appropriate investor suitability

standards.

(iv) Prepare and issue the combined annual and quarterly financial

reports for the Bank System in accordance with the following

requirements:

(A) The scope, form and content of the disclosure generally shall

be consistent with the requirements of the Securities and Exchange

Commission's Regulations S-K and S-X (17 CFR parts 229 and 210);

(B) Information about each Bank shall be presented as a segment of

the Bank System as if Statement of Financial Accounting Standards No.

131, titled ``Disclosures about Segments of an Enterprise and Related

Information'' (FASB 131) applied to the combined annual and quarterly

financial reports of the Bank System.

(C) The standards set forth in paragraphs (c)(1)(iv)(A) and (B) of

this section are subject to the exceptions set forth in the Appendix to

this part 941.

(D) The OF shall file with the Finance Board and distribute to each

Bank and Bank member the combined Bank

[[Page 336]]

System annual report within 90 days after the end of the fiscal year,

and the combined Bank System quarterly report within 45 days after the

end of the first three fiscal quarters of each fiscal year.

(E) The Finance Board in its sole discretion shall determine

whether or not a combined Bank System annual or quarterly financial

report prepared by the OF pursuant to Sec. 941.8 complies with the

standards of this part 941.

(F) The OF shall promptly comply with any directive of the Finance

Board regarding the preparation, filing, amendment or distribution of

the combined Bank System annual or quarterly financial reports.

(v) Provide capital markets information concerning debt to the

Banks;

(vi) Manage relationships with the Nationally Recognized

Statistical Rating Organizations in connection with their rating of

consolidated obligations;

(vii) Conduct research reasonably related to the issuance or

servicing of consolidated obligations.

(2) The OF shall, to the extent requested by two or more Banks

pursuant to any agreement or contract, facilitate or provide services

for the management and administration of joint asset activities of the

Banks otherwise authorized by law and in accordance with this part,

including without limitation:

(i) Providing administrative and technical support for the

origination, purchase, management, servicing, or sale of any assets

acquired or to be acquired by two or more Banks pursuant to any

agreement or contract, including Member Mortgage Assets;

(ii) Providing market information to the Banks concerning joint

asset activities, or other assets or investments, as necessary from

time to time;

(iii) Conducting and providing to the Banks research reasonably

related to joint asset activities or other assets or investments of the

Banks, as necessary from time to time;

(iv) Developing, administering, and maintaining appropriate systems

for timely monitoring of each Bank's unsecured credit exposure to

individual counter-parties, and appropriate systems to manage Bank

System exposure to counter-party risk within Bank System limits;

(v) Adopting and administering procedures to enable the Banks to

jointly manage their liquidity; and

(vi) Adopting procedures to facilitate the sale or participation of

advances and other assets among the Banks.

(3) In accordance with policies and procedures established by the

OF Board of Directors, the OF shall perform such duties and

responsibilities for the Financing Corporation (FICO) or the Resolution

Funding Corporation (REFCorp) on behalf of the Banks, as may be

required.

(d) Use of facilities or personnel. The OF may contract with a Bank

or Banks for the use of Bank facilities or personnel in order to

perform its functions.

Sec. 941.3 Finance Board oversight.

(a) Oversight and enforcement actions. The Finance Board has the

same regulatory oversight authority and enforcement powers over the OF,

the OF Board of Directors, the directors, officers, employees, agents,

attorneys, accountants or other OF staff, as it has over a Bank and its

respective directors, officers, employees, attorneys, accountants,

agents or other staff.

(b) Examinations. Pursuant to section 20 of the Act (12 U.S.C.

1440), the Finance Board shall examine the OF, all funds and accounts

that may be established pursuant to this part 941, and the operations

and activities of the OF, as provided for in the Act or any regulations

promulgated pursuant thereto.

Sec. 941.4 The OF board of directors.

(a) Composition of the OF board of directors. The OF Board of

Directors shall consist of 24 members, 6 of whom shall be appointed by

the Finance Board, 6 of whom shall be elected by members of the Banks,

and 12 of whom shall be appointed by the Banks.

(1) Finance Board appointments. The Finance Board shall appoint a

total of six directors. Each director appointed by the Finance Board

shall be a citizen of the United States having demonstrated experience

in financial markets or asset management. An individual who is

affiliated with any consolidated obligation selling or dealer group

member under contract with the OF is not eligible to be appointed or

serve as a member of the OF Board of Directors.

(2) Bank appointments. Each Bank shall, by resolution of its board

of directors, appoint one director, who shall be an officer, director

or employee of the Bank.

(3) Member elections. Bank System Members shall elect six directors

through annual elections conducted by the OF.

(i) Eligibility requirements. To be eligible for nomination,

election, and service as a member of the OF Board of Directors, an

individual shall be a citizen of the United States with demonstrated

experience in financial markets or asset management. An individual who

is affiliated with any consolidated obligation selling or dealer group

member under contract with the OF is not eligible to serve as a member

of the OF Board of Directors. A Bank System member and its affiliates

may not have more than one representative on the OF Board of Directors

at any time.

(ii) Member-elected directorships and certain restrictions. Each

member of the Bank System is entitled to nominate an eligible person

for service on the OF Board of Directors in each annual election. Two

member-elected directorships shall be filled each year from such

nominees by a plurality of the votes which such members may cast in an

election held by the OF under this part 941. Each member may cast a

number of votes equal to the number of shares of stock in such Bank

held by the member at the end of the calendar year preceding the

election.

(iii) Nominations. The OF shall prepare the nomination forms and

transmit them to the Bank System members no later than March 1st of the

election year. The nomination forms shall state the director

eligibility requirements and the restrictions. Members shall have not

less than 30 calendar days to submit nomination forms to the OF. The OF

shall create acceptance and certification of eligibility forms, and

provide such forms to the nominees no later than May 1st of the

election year and the nominees shall have 30 days to accept or decline

the nomination and provide the written eligibility certification to the

OF.

(iv) Ballots. The OF shall prepare a ballot for the OF Board of

Directors election to be used in each Bank district based on the

acceptance and certification forms, and provide the ballot to the Banks

no later than July 1st of the election year. The Banks shall transmit

the ballot to their members with the election ballots for the election

of the Banks' respective boards of directors. Bank System members shall

have a minimum of 30 days to vote and return the OF Board of Directors

election ballot to the OF. The OF will tabulate the ballots and

announce the slate of the OF Board of Directors no later than November

1st of the election year.

(b) Terms. The term of each director shall be three years and

initial terms shall be staggered such that \1/3\ of the terms expire

each year.

(c) Vacancies. (1) In general. An OF director appointed or elected

to fill a vacancy shall be appointed or elected only for the remainder

of the term during which the vacancy occurred.

[[Page 337]]

(2) Appointed directors. Vacancies in directorships appointed by

the Finance Board or the Banks shall be filled in the manner in which

the original appointment was made.

(3) Elected directors. Vacancies in directorships elected by Bank

System members shall be filled by a majority vote of the remaining

directors.

(d) Chair and vice chair. (1) The Finance Board shall designate one

member of the OF Board of Directors as the chair, and another member as

the vice chair.

(2) The chair shall preside over meetings of the OF Board of

Directors. In the absence of the chair, the vice chair shall preside.

The chair is responsible for ensuring that the directives and

resolutions of the OF Board of Directors are drafted and maintained and

for keeping the minutes of all meetings.

(e) Compensation. Members of the OF Board of Directors may receive

compensation and reimbursement for expenses incurred as a result of

their service on the OF Board of Directors.

(f) Committees. (1) The OF Board of Directors shall establish an

audit committee consistent with the requirements set forth in part 917

of this chapter.

(2) The OF Board of Directors shall establish an executive

committee comprising member-elected directors, Bank-appointed

directors, and Finance Board-appointed directors, each represented in

the same proportions as they are on the full OF Board of Directors.

(3) The OF Board of Directors shall establish a committee to

coordinate the issuance and servicing of consolidated obligations under

part 910 of this chapter.

(4) The OF Board of Directors may establish additional committees

that are necessary and appropriate to carry out the duties and

responsibilities of the OF Board of Directors.

(5) The OF Board of Directors shall promulgate policies and define

the roles and duties of any committees so established, which shall be

binding upon such committees.

(g) Quorum. A quorum, for purposes of meetings of the OF Board of

Directors and of meetings of committees of the OF Board of Directors,

shall be a simple majority of the total directorships on the OF Board

of Directors or the committee.

Sec. 941.5 Powers of the OF board of directors.

(a) General. The OF Board of Directors shall enjoy such incidental

powers under section 12(a) of the Act (12 U.S.C. 1432(a)), as are

necessary, convenient and proper to accomplish the efficient operation

and management of the OF pursuant to this part, consistent with part

917 of this chapter.

(b) Agent. Subject to any limitations set by the Finance Board, the

OF Board of Directors, in the performance of its duties, shall have the

power to act on behalf of:

(1) The Banks in issuing consolidated obligations pursuant to

section 11(a) of the Act (12 U.S.C. 1431(a));

(2) The Finance Board in issuing consolidated obligations pursuant

to section 11(c) of the Act (12 U.S.C. 1431(c)); and

(3) The Banks in paying principal and interest due on the

consolidated obligations, or other obligations of the Banks.

(c) Delegation. The OF Board of Directors may delegate any of its

powers to any employee of the OF in order to enable the OF to carry out

its functions.

(d) Indemnification. (1) The OF Board of Directors may determine

the terms and conditions under which its members, the Chief Executive

Officer, and other officers and employees of the OF will be indemnified

by the OF, provided that such terms and conditions are consistent with

the terms and conditions of indemnification of directors, officers and

employees of the Bank System, generally.

(2) Such indemnification procedures, when duly adopted, may be

supplemented by a contract of insurance, and all expenses incident to

indemnification will be treated as an expense of the OF.

Sec. 941.6 Duties of the OF board of directors.

(a) General. (1) Bylaws. The OF Board of Directors shall adopt

bylaws, consistent with applicable laws and regulations as administered

by the Finance Board, governing its operation and issue such guidance

or instruction as will promote the efficient operation of the OF.

(2) Conduct of business. The OF Board of Directors shall conduct

its business by majority vote of its members convened at a meeting in

accordance with its bylaws.

(b) Oversight. The OF Board of Directors shall:

(1) Be responsible for the conduct and performance of all duties,

functions, operations and activities of the OF and for its efficient

and effective operation;

(2) Set policies for management of the OF, including a policy

addressing the relationship between the Banks as issuers of debt and

Bank System members as issuers of debt;

(3) Approve a strategic business plan for the OF and monitor the

progress of its operations under such plan;

(4) Review, adopt and monitor the annual operating and capital

budgets of the OF including any supplemental expenditure thereto;

(5) Select, employ and define the duties of a Chief Executive

Officer of the OF. The Chief Executive Officer, or the Chief Executive

Officer's designee, shall be:

(i) The Fiscal Agent of the Banks;

(ii) A member of the Directorate of the Financing Corporation,

pursuant to section 21(b)(1)(A) of the Act (12 U.S.C. 1441(b)(1)(A);

and

(iii) A member of the Directorate of the Resolution Funding

Corporation, pursuant to section 21B(c)(1)(A) of the Act (12 U.S.C.

1441b(c)(1)(A)).

(6) Review and approve all contracts of the OF; and

(7) Assume any other responsibilities that may from time to time be

delegated to it by the Finance Board.

(c) The OF Board of Directors shall be subject to and shall operate

in accordance with Finance Board policies and regulations as applicable

to the boards of directors of the Banks, including part 917 of this

chapter.

Sec. 941.7 Funding of the OF.

(a) General. The Banks are responsible for jointly funding the OF.

(b) Method. (1) At the direction of and pursuant to policies and

procedures adopted by the OF Board of Directors, the Banks shall

periodically reimburse the OF Operations Imprest Fund in order to

maintain in such fund an amount approved by the OF Board of Directors

sufficient to fund operations of the OF under a budget approved by the

OF Board of Directors.

(2) Each Bank's respective pro rata share of the reimbursement

described in paragraph (b)(1) of this section shall be based on the

ratio of the total paid-in value of its capital stock relative to the

total paid-in value of all capital stock in the Bank System. With the

prior approval of the Finance Board, the OF Board of Directors may

implement an alternative formula for determining each Bank's respective

share of the OF expenses or, by contract with a Bank or Banks, may

choose to be reimbursed through a fee structure in lieu of or in

addition to assessment, for services provided to the Bank or Banks for

the issuance or servicing of consolidated obligations or the management

and administration of joint asset activities.

Sec. 941.8 Savings clause.

All actions taken by the OF as it existed prior to the amendments

made

[[Page 338]]

to this part shall continue to be valid as regards the Finance Board

and the Bank System.

Appendix A to Part 941--Exceptions to the General Disclosure

Standards

A. Related-Party Transactions. Item 404 of Regulation S-K, 17

CFR 229.404, requires the disclosure of certain relationships and

related party transactions. In light of the cooperative nature of

the Bank System, related-party transactions are to be expected, and

a disclosure of all related-party transactions that meet the

threshold would not be meaningful. Instead, the combined annual

report will disclose the percent of advances to members an officer

of which serves as a Bank director, and list the top 10 holders of

advances in the Bank System and the top 5 holders of advances by

Bank, with a further disclosure indicating which of these members

had an officer that served as a Bank director.

B. Biographical Information. The biographical information

required by Items 401 and 405 of Regulation S-K, 17 CFR 229.401 and

405, will be provided only for the members of the Board of Directors

of the Finance Board, Bank presidents, chairs and vice chairs, and

the directors and Chief Executive Officer of the OF.

C. Compensation. The information on compensation required by

Item 402 of Regulation S-K, 17 CFR 229.402, will be provided only

for Bank presidents and the Chief Executive Officer of the OF. Since

stock in each Bank trades at par, the Finance Board will not include

the performance graph specified in Item 402(1) of Regulation S-K, 17

CFR 229.402(1).

D. Submission of Matters to a Vote of Stockholders. No

information will be presented on matters submitted to shareholders

for a vote, as otherwise required by Item 4 of the SEC's form 10-K,

17 CFR 249.310. The only item shareholders vote upon is the annual

election of directors.

E. Exhibits. The exhibits required by Item 601 of Regulation S-

K, 17 CFR 229.601, are not applicable and will not be provided.

F. Per Share Information. The statement of financial information

required by Items 301 and 302 of Rule S-K, 17 CFR 229.301 and 302,

is inapplicable because the shares of the Banks are subscription

capital that trades at par, and the shares expand or contract with

changes in member assets or advance levels.

G. Beneficial Ownership. Item 403 of Rule S-K, 17 CFR 229.403, requires

the disclosure of security ownership of certain beneficial owners and

management. The combined financial report will provide a listing of the

10 largest holders of capital stock in the Bank System and a listing of

the 5 largest holders of capital stock by Bank. This listing will also

indicate which members had an officer that served as a director of a

Bank.

By the Board of Directors of the Federal Housing Finance Board.

Dated: December 14, 1999.

Bruce A. Morrison,

Chairman.

[FR Doc. 00-35 Filed 1-3-00; 8:45 am]

BILLING CODE 6725-01-P